Before you sign or renew a SaaS contract do this first

Challenge

Today, due to the rising protectionism globally, Brexit locally and now the Coronavirus epidemic, the risk of a recession has become a likely reality. As a result, many organisations are expected to face a revenue decline of up to 20% or more in certain industries (airlines, hospitality). This in turn, will cause a freeze or reduction in future IT budget due to recession.

Impact

Organisations are increasingly adopting SaaS for the ease of deployment and operations. Often, organisations will sign a contract for 2-3 years in return for fixed subscription fees and at the end of the contract, they renew with a 5-10% increase in their subscription fees. As a result, your SaaS portfolio will always present an ever-increasing cost in comparison with public IaaS, which has a trend of continuous declining costs (see diagram).

Facing SaaS increasing cost combined with slashed technology budget, will be a key challenge for many CIOs.

Solution

The one advice I have offered clients in the past, is to negotiate adding a “Business Downturn” clause to your SaaS contract. This simply proposes reducing subscription fees by x% if organisation’s revenue drops by y%. For example, if revenue should drop by 5%, then the SaaS provider will discount your subscription fees by 10%, in return for extending your SaaS contract by one year. This is often a back and forth negotiation process to define the required drop in revenue to trigger discounts, the amount of discount to be applied, and the duration of a contract extension the client agrees to.

I suggest you start with a SaaS vendor that you have the best relationship with. Once successful in negotiations, you can use the new revised agreement as a precedent when negotiating with other your SaaS vendors.

SaaS providers want to keep your business as it is more cost-effective for them than acquiring new customers. In today’s tough business conditions, negotiating a downturn business clause is a smart business decision.

Thank you for reading.

Nick